Your Tax Obligations Under Bankruptcy
If you owe past due federal taxes that you cannot pay, bankruptcy may be an option. Your back taxes, interest and penalties may be wiped out by filing bankruptcy. If you qualify, bankruptcy might be an excellent solution to resolve your crushing tax problems.
Unfortunately, not everyone qualifies to wipe out their tax debt in bankruptcy. Certain rules have to be met first. If you file bankruptcy and don’t meet the rules, the IRS will still be in hot pursuit after your bankruptcy is over. Proper pre-bankruptcy planning is key to determining if bankruptcy is or can be a viable solution.
Before you consider filing bankruptcy, there are some things you should know:
- You must file all required tax returns for tax periods ending within four years of your bankruptcy filing.
- During your bankruptcy you must continue to file, or get an extension of time to file, all required returns.
- During your case you should pay all current taxes as they come due.
- Failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed.
Five Rules to Discharge Tax Debts
For a tax debt to be dischargeable under a Chapter 7 or Chapter 13 bankruptcy petition, there are a few rules that must be met:
- The due date for filing a tax return is at least three years ago. The tax debt must be related to a tax return that was due at least three years before the taxpayer files for bankruptcy. The due date includes any extensions.
- The tax return was filed at least two years ago. The tax debt must be related to a tax return that was filed at least two years before the taxpayer files for bankruptcy. The time is measured from the date the taxpayer actually filed the return.
- The tax assessment is at least 240 days old. The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
Tax Debts Not Dischargeable
Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer actually files a tax return for the year in question.
There are a few other exceptions but if the tax does not meet the criteria above, it is considered a priority debt and cannot be discharged in bankruptcy.